louisiana municipal natural gas purchasing and...

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THE LOUISIANA MUNICIPAL NATURAL GAS PURCHASING AND DISTRIBUTION AUTHORITY

FINANCIAL STATEMENTS

DECEMBER 31.2011

Under provisions of state law, this report is a public document. A copy ofthe report has been submitted to the entity and other appropnate public officials. The report :s available forpubiic inspection at ifle Baton Rouge office of the Legislative Auditor and. where appropnate, at the office of the pahsh clerk of court.

Release Date H U L 1 1 2012

U S K I Postlethwaite mSsam & Netterville

A Professional Accounting Coq>oration

www.pncpa.com

http://www.pncpa.com

THE LOUISIANA MUNICIPAL NATURAL GAS PURCHASmG AND DISTRIBUTION AUTHORITY

FINANCIAL STATEMENTS

DECEMBER 31,2011


TABLE OF CONTENTS

Page

Independent Auditors' Report 1-2

Management's Discussion and Analysis (Unaudited) 3 - 5

Financial Statements

Statements ofNet Assets 6 - 7

Statements of Revenues, Expenses and Changes in Net Assets 8

Statements of Cash Fiows 9

Notes to Basic Financial Statements 10-18

Supplemental Information

Combining Statements ofNet Assets 19

Combining Statements of Revenues, Expenses and Changes in Net Assets 20

Report on Internal Control over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Govemment Auditing Standards 21-22

Postlethwaite & Netterville

A IVofttuional Accotmling CoqxHxrtion Associated OfBces in Principol CiHes of * ie United SlolM

www.phcpa.com

INDEPENDENT AUDITORS' REPORT

The Board of Directors Hie Louisiana Mmiicipal Natural Gas

Purchasing and Distribution Au&cxity

We have audited the accompanying statements of net assets of The Louisiana Municipal Natural Gas Purchasing and Distribution Authonty (the Authority) as of December 31,2011 and 2010, and tiie related statements of revenues, e:q)enses and changes in net assets, and cash flows for &e years then ended.- These financial statements are tiie responsibility ofthe Autiiorxt '̂s management Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in tiie United States of America and with Govemment Auditing Standards, issued by the Comptroller General ofthe United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements axe free of material misstatement An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures m tiie financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluatmg tiie overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, tiie financial statements referred to above present fiurly, in all material respects, the financial position of The Lomsiana Municqial Natural Gas Purchasing and Distribution Authority as ofDecember 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in conformity witii accounting principles generally accepted in the United States of America.

Accounting principles generally accepted in the United States of America require that the management's discussion and analysis on pages 3 through 5 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by tiie Govemmenlal Accounting Standards Board, i ^ o considers it to be an essential part of financial reporting for placing tiie basic financial statements in an appropriate operational, economic, or historical context We have applied certain limited procedures to tiie required supplementary infonnation in accordance with auditing standards generally accepted in the Uiuted States of America, which consisted of inquiries of management about tiie metiiods of preparing the infonnation and comparing the information for consistency witii management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit ofthe basic financial statements. We do not express an opinion or provide-any assurance on the information because tiie limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

In accordance with Govemment Auditing Standards, we have also issued a report; dated June 4,2012, on our consideration of the Authority's internal control over financial reporting and our tests of its compliance with certsun provisions of laws, regulations, contracts and grants. The purpose of that report is to describe the scope of our testing of intemal control over financial reporting and compliance and the results of that testing and not to provide an opinion on internal control or on con:q}liance. This report is an integral part of an audit perfimned in accordance witii Governmental Auditing Standards and should be read m conjunction witii tiiis rep(nt in considering tiie results of our audits.

8550 United Plaza Blvd, Suite 1001 • Baton Rouge, LA 70809 • Tel: 225.922.4600 • Fax: 225.922.4611

http://www.phcpa.com

Our audits were made for the purpose of fcHming an opinion on ^ e financial statements taken as a whole. The combming statements includ^ on pages 19 and 20 are presented for the purposes of additional analysis' and are not a required part ofthe basic financial statements. The combining statements are the responsibility of management and were derived firom and relate directly to the underlying accounting and other records used to prepare the financial statements. The combining statements have been subjected to tiie auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directiy to the underlying accounting and other records used to prepare the financial statements or to tiie financial statements themselves, and otiier additional procedures in accordance witii auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole.

fo^^Uliiuj^J:^ { lvi^*<?iru/lU. Baton Rouge, Louisiana June 4,2012

P&N


MANAGEMENT'S DISCUSSION AND ANALYSIS aJNAUDITEDl

The Management's Discussion and Analysis of tiie Louisiana Municipal Natural Gas Purchasing and Distribution Authority (the Authority) presents a narrative overview and analysis ofthe Authority's financial activities for the years ended December 31, 2011 and 2010. This document focuses on the current year's activities, resulting changes, and currently known facts in comparison with tiie prior yeai's information. We encourage readers to consider the information presented here in conjunction with the Authority's financial statements, which follow this section.

Financial Highlights

On August 1, 2006 tiie Authority issued revenue bonds series 2006 totaling $223,705,000, &e proceeds of which were used to finance the prepayment of natural gas purchases for a term of 10 years and the related project costs for certain participating municipalities. All activity for this project is referred to and accounted for as the LMNGA Gas Project No. 1 (the I^oject) which is issued and secured under a trust indenture. The Authority's traditional gas purchase and sale activity with members is referred to as the Requirements Gas Fund. The activities and finanpial position ofthe Authority are presented in these financial statements while the separate activities ofthe Requirements Gas Fund and I^INGA Gas Project No. 1 are presented separately as supplemental information on pages 19 and 20.

• The LMNGA Gas Project No. 1 is structured such that the bond proceeds were used to purchase the delivery of specific natural gas quantities at fixed prices over tiie 10 year term of tibe Project The Project also entered into a commodity swap agreement to efiTectively convert the price to be paid for the deliveiy of natural gas for a fixed price to a maiket index based price. The purpose of the Project is to enable members participating in the Project to purchase natural gas at a discount ofthe otherwise market index based prices.

• The assets ofthe Authority exceeded its liabilities at December 31, 2011 by $3,646,236 compared to $3,459,293 as ofDecember 31, 2010^ which is a 5% increase over the previous year. Increase in net assets result primarily fix)m the current year operations of the Project as it is designed to accumulate excess revenues in the initial years, which are to be utilized to meet cash flow needs in later years.

• At December 31,2011, the Authority's assets totaled $124,582,699, which consisted primarily of prepaid gas purchases, accounts receivable and investments, as compared to a balance of $148,512,710 at December 31,2010. This decrease directiy relates to utilization ofthe prepaid natural gas for LMNGA Gas Project No. 1 as discussed below.

• The Requirements Gas Fund purchases and resells gas to members under short term purchase commitments or based on current market prices. The Requirements Gas Fund total gas purchases and sales were $21,353,218 and $24,557,820 during tiie years ended December 31, 2011 and 2010, respectively. Decrease from the prior year is primarily a result ofthe decrease in market based natural gas prices during 2011.

• Gas sales for tiie LMNGA Gas Project No. 1 were $19,832,126, and are comprised of $6,442,514 of mcome recognized on the commodity swap accretion ofthe prepaid gas purchase asset and $13,389,612 of gas sales, for the year ended December 31, 2011. In the prior year, gas sales for the Project were $23,214,998, comprised of $7,633,242 recognized on tfie swap accretion and $15,581,756 of gas sales. These sales figures are netted in the operating revenues by $740,353 and $726,146 of discounts given to participants in the prepay program for the years ended December 31,2011 and 2010, respectively.

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MANAGEMENT'S DISCUSSION AND ANALYSIS (UNAUDITED)

Overview ofthe Finandal Statements

This financial report consists of Management's Discussion and Analysis and the basic financial statements. The basic financial statements also include notes to the basic financial statements, which e?q}lain some ofthe infonnation in the basic financial statements in more detail.

The basic financial statements of the Authority report information about the Authority using accounting methods similar to those used by the private sector. The Authority's financial statements include its activity in the Requirements Gas Fund and the activity ofthe Project. The Statements ofNet Assets include all ofthe Authority's assets and liabilities and provide information about the nature and amounts of investments in resources (assets) and the obligations to tbe Authority's members and creditors (liabilities). It also provides the basis for computing rate of retum, evaluating the capital stmcture of tiie Authority and assessing tiie liquidity and financial fiexibility ofthe Authority. All oftiie years' revenues and e^qsenses are accounted for in the Statements of Revenues, Expenses and Changes in Net Assets. These statements measure the success of the Authority's operations over the year and can be used to determine whether the Authority has successfiilly recovered all its costs through its operating revenue, profitability and credit worthiness. The final required basic financial statements are the Statements of Cash Flows. The primary purpose of these statements is to provide infonnation about the Authority's cash receipts and cash payments throughout the year. These statements report cash receipts, cash payments and net changes in cash resulting firom operations, investing, and financing activities.

Fmancial Analysis ofthe Authority

The Statements ofNet Assets and the Statements of Revenues, Expenses and Changes in Net Assets report infonnation in a way that the reader can determine if the Authority is in a better financial position as a result ofthe year's activities. These statements report the net assets of &e Autiiority and changes in them. The net assets (ditference between assets and liabilities) can be used to measure financial health or financial position. Over time, increases and decreases in the Authority's net assets are one indicator as to whether its financial health is improving or deteriorating. There are otiier non-financial factors to consider, such as changes in economic conditions, judicial environment, and new or changed government legislation.

Condensed Statements of Net Assets

December 31.2011 December 31.2010

Total assets $ 124,582.699 $ 148,512,710

Total liabilities 120.936.463 145.053.417

Netassets | 3.646.236 $ 3 459293

At December 31, 2011, the Authority's assets consist primarily of pr^aid gas purchases, investments, and accounts receivable fi-om member municipalities throu^out Louisiana. At December 31, 2011, accounts receivable decreased by 18% fix)m the prior year due to decreased prices and lower volume compared to December oftiie prior year. A similar decrease in accounts payable for gas purchases was experienced in the end of 2011. The financial stmcture ofthe Project is intended to accumulate excess revenues (net assets) in the initial years which are to be utilized to meet expected cash flow needs m later years ofthe Project.

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MANAGEMENT'S DISCUSSION AND ANALYSIS fUNAUPrTED)

Overview ofthe Financial Statements (continued)

The Authority had debt outstanding of $116,300,000 at December 31, 2011 and $138,780,000 at December 31,2010 consisting primarily of revenue bonds related to the Project. The Authority also has short term lines of credit available to fimd working capital needs during high demand periods. There were no borrowings as ofDecember 31,2011. Repayment of principal and interest on the revenue bonds related to Gas Project No. 1 began in August, 2007 and scheduled to continue through August, 2016.

Condensed Statements of Revenues and Expenses for the Years Ended December 31:

2011 2010

Operating revenues and mterest income $ 41,769,264 $ 48,434,760

Operating e3q>enses 41.582.321 48.058.508

Change in net assets $ 186.943 $ 376.252

The Authority experienced an excess of revenues over expenses in 2011 and 2010. During the year ended December 31, 2011, the Autiiority reported operating revenues and interest income of $41,769,264, which reflected revenue torn both the LMNGA Gas Project No. 1 Fund and tiie Requirements Gas Fund. The Authority reported total expenses $41,582,321, v^ich consist primarily oftiie cost of natural gas purchased firom vendors and interest expense.

Requests for Infonnation

This financial report is designed to provide members, invest<M ,̂ and creditors with a general overview ofthe Authority's finances, as well as demonstrate accountability for fimds the Authority receives. Questions concerning any of the information provided in this report or requests for additional information should be addressed to the Louisiana Municipal Natural Gas Purchasing and Distribution Authority, P.O. Box 4327, Baton Rouge, Louisiana 70821 or 225-344-5001.

THE LOUISUNA MUNICIPAL NATURAL GAS PURCHASING AND DISTRIBUTION AUTHORITY

STATEMENTS OF NET ASSETS DECEMBER 31,2011 AND 2010

ASSETS

Current assets: Cash and cash equivalents Accounts receivable, net Investments, at fair value Accmed interest receivable Prepaid insurance Prepaid natural gas purchases.

Total current assets

current portion

2011

$ 394,967 6,900.420 6,601,359

79,474 10,106

22,388,728

36,375,054

2010

$ 282,582 8,438,935 6,958,088

80,328 10,106

21,938,352

37,708,391

Other assets: Investments, restricted, at fair value Deferred financing costs, net of accumulated amortization Prepaid natural gas purchases

Total other assets

Total assets

1,605,158 481,567

86,120,920

88,207,645

1,605,158 688,897

108.510,264

110,804,319

$ 124,582,699 $ 148.512,710

The accompanying notes are an integral part of these basic financial statements.

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LUBHJTIES AND NET ASSETS

2011 2010

Current liabilities: Accounts payable and other liabilities Interest payable Bonds payable, current portion

Total current liabilities

$ 2,447,548 2,188,915

22,620,000

27,256.463

3,661,413 2.612,004

22,480,000

28.753,417

Long-term liabilities: Bonds payable

Total liabilities

93,680.000

120,936,463

116,300,000

145,053,417

Net assets - unrestricted Net assets - restricted bond mdentures

Total net assets

Total liabilities and net assets

410,593 3,235,643

3,646,236

489,596 2.969.697

3,459,293

$ 124,582,699 $ 148,512,710

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STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS YEARS ENDED DECEMBER 31.2011 AND 2010

2011 2010

Operating revenues: Gas sales Membership dues Legal fees billed Late charges

Less: prepay/member discount

Total operating revenues

Operating expenses: Cost of natural gas Purchase agent fee Management fee Interest expense Legal and professional fees Bad debt expense Miscellaneous expenses Arbitrage tax expense

Total operating expenses

Operating loss

Other revenues: Interest income

Change in net assets

Net assets, beginning of year

Net assets, end of year

$ 41,185,344

600,620 66,354

3,548

(740.353)

$ 47,772,818

659,559 73,096

1,462

(726,146)

41,115,513

41,582.321

(466,808)

653,751

186,943

3,459,293

47,780.789

34,720,554

400,411

165,886

6,052,932

134,287

67,667

31,992

8.592

40,103,862

439,683

182,729

7,111,763 108,753

33,031

35,725

42,962

48,058,508

(277,719)

653,971

376,252

3,083.041

$ 3,646,236 $ 3,459^3

The accompanymg notes are an integral part of these basic financial statements.

THE LOUISUNA MUNICIPAL NATURAL GAS PURCHASING AND DISTRIBUTION AUTHORITY

STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31.2011 AND 2010

2011 2010

Cash flows fi'om operating activities: Operating loss Amortization of deferred financing costs, included in interest

e7q)ense Amortization of prepaid gas purchases Bad debt Adjustments to reconcile operating loss to net cash provided by

operating activities: Change in accounts receivable Change in accounts payable and other liabilities Change in interest payable

Net cash provided by operating activities

Cash flows firom investing activities: Purchase of investments Interest income received

Net cash provided by provided by investing activities

Cash flows fi'om financing activities: Payments on bonds payable

Net cash used in financing activities

Net change in cash

Cash, beginning of year

Cash, end of year

Supplemental disclosure of cash flow information: Cash paid for interest

$ (466,808) $ (277,719)

207,330

21,938,968

1,538,515 (1,213,865) (423.089)

21.581,051

356,729 654,605

1.011.334

(22.480.000)

(22.480.000)

117,385

282.582

$ 394,967

$ 5,846,456

244,080 21,978,724

33.031

(125,467) 420,628 (427,750)

21,845,527

310,027 654,638

964.665

(22.730,000)

(22.730,000)

80,192

202,390

$ 282,582

$ 6.868,350

The accompanying notes are an integral part of these basic financial statements.

-9

THE LOUISL^A MUNICIPAL NATURAL GAS PURCHASING AND DISTRIBUTION AUTHORITY

NOTES TO BASIC FINANCIAL STATEMENTS

1. SUMMARY OF SIGNPICANT ACCOUNnNG POLICIES

The Louisiana Municipal Natural Gas Purchasing and Distribution Authority (the Authority or LMNGA) is a quasi-public corporation and an instrumentality of the State of Louisiana, created on November 23, 1987 pursuant to La. R.S, 33:4546.1 et seq. for the purpose of purchasing and distributing natural gas to participating municipalities and political subdivisions.

On August 1,2006, the Authority entered mto the LMNGA Gas Project No. 1, whereby tiie Autiiority acquired natural gas supplies for participatmg municipalities utilizing a commodities swap transaction for a period of ten years in order to supply a portion of the natural gas purchases to participating muiucipalities. In conjunction with this transaction, the gas supplies were purchased with the proceeds oftiie $223,705,000 fi-om tiie LMNGA Revenue Bonds, Series 2006.

(a) Basis of Accounting

The Authority's LMNGA Gas Project No. 1 Fund as well as the Requirements Gas Fund are considered to be proprietary type fimds and are combined and presented as a single business type activity.

As a proprietary fund, the Authority's operations are accounted for using a flow of economic resources, measurement focus and the accrual basis of accounting. Proprietary fimds are used to account for governmental activities that are similar to those foimd in the private sector where the determination of operating income and changes in net assets is necessary or useful to sound financial administration. Under tiiis method of accounting, all assets and all liabilities associated with tiie operation of these funds are mcluded on tiie Statement of Net Assets. The operating statements present increases (revenues) and decreases (e}q>enses) in net assets. The Authority maintains two proprietary fiinds, which are enterprise fimds. These funds are maintained separately as a result ofthe requu'emehts ofthe bond indenture.

The financial statements of the Authority have been prepared m conformity with accounting principles generally accepted in the United States of America (GAAP) as applied to govemmental units. The Govemmental Accounting Standards Board (GASB) is the accepted standard setting body for establishing govemmental accounting and financial reporting principles. The Program applies Financial Accounting Standards Board pronouncements and Accounting Principles Board opinions issued on or before November 30, 1989 unless those pronouncements conflict with or contradict GASB pronouncements in which case, GASB prevails.

(b) Allowance for Uncollectible Accounts

Management of tiie Authority assesses the status and coUectability of accounts receivable and believes all accounts receivable are collectible based upon &vorable histoiy over a substantial period of time; therefore, an allowance for uncollectible accounts has not been provided.

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THE LOUISIANA MUNICIPAL NATURAL GAS PURCHASING AND DISTOIBUTION AUTHORITY

NOTES TO BASIC FINANCUL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(c) Deferred Financing Costs

Deferred financing costs represent various costs incuned in conjunction with the issuance ofthe 2006 Revenue Bonds. These costs are deferred and amortized over tbe life ofthe indebtedness based upon tiie principal amounts of the bonds outstanding, which approximates the interest method.

(d} Investments

Under the provisions of the LMNGA Gas Project No. 1, the Authority is required to establish and maintain certain reserve accounts. In accordance with the Indenture of Trust between the Authority and its Trustee, portions of these reserve accounts can be temporarily invested in guaranteed interest contracts. Investments are classified as cunent and long term resulting fiom payment requirements stated in the bond indenture.

Provisions of GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and External Investment Pools, permits the recording of guaranteed interest contracts at cost if the contributions are non-participating. Non-participating contracts are those non-negotiable and non-transferable and redeemable at contract or stated value rather than fiiir value based on current market rates. All of the Authority's investment contracts are non-participating and are tiierefore reported at cost, which are deemed to approximate fan* value.

(e) Prepaid Gas Purcltases

Prepaid natural gas purchases represent a ten year supply contract for natural gas beginning August 1, 2006, \^^ich was purchased for participating members to be sold to such members in accordance with gas sales contracts. These original purchases consisted of approximately 30,000.000 MMBtu (one million British Thermal Units) of natural gas and were purchased through a commodities transaction. These natural gas purchases are valued and recorded at cost less amortization for the value of deliveries of gas volumes in the accompanying statements of net assets. The cost of this contract is capitalized and amortized ratably based upon deliveries of contractual volumes and unit prices of future gas supply anangements.

ff) Purciiase Agent Fee

The Authority has two contracts with a gas management firm to act as the exclusive agent to purchase natural gas for the Authority for the Requirements Fund. The contracts are for a five (5) and ten (10) year period, which expires April 30,2013 and July 30,2016, respectively.

(g) Management Fee

The Authority contracts with the Louisiana Mimicipal Association (LMA) to man^e the affairs ofthe Authority. Under tiiis agreement, LMA provides the Authority an Executive Director and other personnel necessary to carry out the functions ofthe Authority and its membership. The Authority's Board of Directors and Executive Committee administer and establish policies for tiie management ofthe Authority. For tiie years ended December 31, 2011 and 2010, amounts paid to LMA by the Authority related to this management fee totaled $165,886 and $182,729, respectively. The agreement is for a five (5) year period ending April 30,2013.

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THE LOUISIANA MUNICIPAL NATURAL GAS PURCHASING AND DISHUBUTION AUTHORITY


L SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(k) Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date ofthe financial statements and tiie reported amounts of revenues and expenses during the reporting period. Actual results could differ firom those estimates and assumptions.

(i) Revenues

For the Requirements Gas Fund, the Autiiority purchases natural gas for its members and bills them for the cost of the gas plus a fee per unit of natural gas purchased. This fee comprises the Authority's membership dues. Accordingly, receivables fix)m the members and payables to the vendon are generated when gas is delivered into the respective pipelines. The membership dues collected firom members are allocated entirely to pay the aforementioned purchase agent and management fees and other operating costs of the Authority.

For the LMNGA Gas Project No. 1 Fund, the Authority bills participating members montiily based upon gas sales contracts entered into with each member for the ten year period i ^ c h the project covers.

Q) Operaiing/Non-^yperating Revenue and Esqpenses

Operating revenues consist of gas sales, membership dues, legal fees billed and late charges assessed as these revenues are generated fi:om the Authority's operations and are needed to carry out its statutory purpose. All expenses incurred for that purpose are classified as operating expenses. Interest income and other revenues and expenses which are ancillaiy to the Authority's statutory purpose are classified as non-operating.

(k) Income Taxes and Arbitrage Tax

The Authority is exempt fi-om income taxes under Sections 7701 and 115(1) ofthe Intemal Revenue Code. As discussed in Note 8, the LMNGA Gas Project No. 1 is subject to arbitrage rebate obligations to the U.S. Govemment to maintain a tax exempt status.

(I) Derivatives

In conjunction with the LMNGA as Project No. 1, the Authority has entered into two derivative contracts, including an interest rate swap ^ i c h serves to essentially fix the rate of interest on its variable rate bonds, as well as a commodity prices hedge to convert the price of gas quantities acquired under a commodities purchase agreement fix}m a fixed price to a variable market indexed based price. In accordance with current GASB standards, no related assets or liabilities related to the fair value of these derivative contracts are recorded in tiie basic financial statements, but the estimated fau* market values are disclosed in the accompanying notes to the basic financial statements.

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2. CASH AND INVESTMENTS

For reporting purposes, cash and cash equivalents include cash on band, demand deposits, unrestricted money market accounts and all highly liquid investments with an original maturity of three months or less. Cash and cash equivalents are stated at cost, which approximates fair value.

Custodid Credit Risk For an investment, custodial credit risk is tiie risk that, in the event of tiie failure of the counterparty, the Authority will not be able to recover tiie value of its investments or collateral securities that are in the possession of an outside party. The Authority's investments are held by the custodial bank as an agent for the Authority, in the Authority's name, and are tiiereby not exposed to custodial credit risk.

Pursuant to Louisiana Revised Statute of 1950, as amended, the Autiiority m ^ invest in obligations of the U.S. Treasury, U.S. Agencies and instrumentalities that are guaranteed by the U.S. Govemment or U.S. Government Agencies, repurchase agreements, certificates of deposit as provided by the statute mentioned above, and other investments as determined by the terms of bond trust indentures.

Concentration of Credit Risfc Concentration of credit risk relates to the risk of loss attributed to the magnitude of the Authority's investment in a single issuer. At December 31, 2011 primarily all investments are consist of guaranteed investment contracts and are with a single issuer.

Interest Rate Risk. Interest rate risk is the risk that changes in interest rates will adversely affect the estimated fair value of an investment hivestments are primarily composed of guaranteed interest contracts and, therefore, minimal e3q>osure to interest rate risk.

During 2006 the Authority established certain reserve fimds in connection with LMNGA Gas Project No. 1 as stipulated in the related contractual agreements. These reserves are pledged as collateral for all bond related payments, including principal and interest payments due each bond year which ends each July 31. These fiinds are restricted for their stated purpose by the bond indenture agreements.

As of December 31,2011 and 2010, the Authority had the following investments:

Money maricet accounts Guaranteed Investment Contracts issued by JPMorgan Chase

5.163% Due 7/30/16 5.086% Due 7/30/16

2011 Estimated Fair Value

$ 13,585

6,587,774 1.605.158

2010 Estimated Fair Value

$ 45,713

6,912,375 1,605,158

Total $ 8.206.517 $ ?,g«,2;4^

The guaranteed investaient contracts (GICs) are unsecured contracts which cannot be sold or traded. Redemption of these investments depends solely on the financial condition of JPMorgan Chase which provides the contracts, and its ability to honor their obligations. According to the terms of the bond indenture, the Authority is required to maintain certain account balances in a reserve account which have therefore been classified in the accompanying basic financial statements as restricted assets.

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3. PREPAID NATURAL GAS PURCHASES

In an effort to reduce the fluctuations and variability of natural gas supply and prices to its members, the Authority developed tiie Prepaid Gas Program (LMNGA Gas Project No. I). Under the Program, tiie Authority has entered into natural gas supply agreements with participating Louisiana municipalities (the Participants) whereby the participants will purchase minimum natural gas volumes fix>m the Program over a 10 year period. The Autiiority has also entered into a commodity price hedge agreement with a commodity counterparty for the same 10 year term to effectively convert the gas purchased by the Authority under the prepaid gas supply agreement fiom a fixed price basis to a market indexed based price. In order to fiilfill these minimum member purchase commitments, on August 1, 2006 tiiie Authority entered into a Purchase Agreement, with JPMorgan Ventures Energy Corporation, and several related contracts, to procure contractually agreed upon natural gas volumes at fixed prices over a term of ten years. JPMorgan Chase also guarantees the performance obligation under the Purchase Agreement. The Authority has converted the price of natural gas under tiie Purchase Agreement to an index-based price by entering into a commodity price hedge with BNP Paribas for a period equal to that of the Purchase Agreement. This commodity swap agreement is intended to reduce the Authority's, and ultimately participating municipalities', e}^osure to fluctuations in price of natural gas over the term ofthe Program. See note 4.

The natural gas Purchase Agreement was entered into at inception of the Program for a total $218,371,000 for the purchase of approximately 30 million MMBtu of natural gas. These purchases were funded by bonds issued by the Authority, which are described in note 5. The cost of the gas purchase agreement is charged to cost of natural gas in the financial statements as natural gas is delivered in accordance with terms of the agreement. For the years ended December 31, 2011 and 2010, included in the cost of natural gas expense as a component ofthe cost of gas in the statement of revenues, expenses and changes in net assets was $22 million and $22 million, respectively, related to tiie utilization amortization of the prepaid gas purchase. As of December 31, 2011, prepaid gas purchases to be delivered within 12 months are considered to be current assets totaling $22388,728 and gas deliveries due beyond one year totaled $86,120,920.

4. PURCHASE COMMITMENTS AND SIGNIFICANT RISK CONCENTRATIONS

In order to convert the price of natural gas acquired pursuant to the above mentioned Purchase Agreement fiom a fixed price to a market index based price, the Authority entered into the commodity price hedge for identical gas quantities and term ofthe prepaid gas purchase^ agreement The fair value of the outstanding derivative at December 31, 2011 and 2010 is estimated to be an asset of approximately $59 million and $50 million, respectively. The impact of executing tbe derivative agreement coupled with the effect on the natural gas asset results in an overall impact to tiie prepaid natural gas asset basis approximating fair value.

The prepaid gas purchase agreement and swap agreement exposes the Authority to credit risk, in the event the counterparties are unable to fulfill their obligation. The commodity swap agreement requires collateral to be posted in varying amounts depending on the counterparty's credit rating. As of December 31, 2011, the counterparty was rated as Aa3 according to Moody's and AA- according to Standard & Poor's and, therefore, no collateral has been required to date under the terms of the existing agreements. Management continues to evaluate the counterparty credit risk and associated collateral requu-ements as well as potential credit deterioration in all financial institutions due to overall economic conditions.

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PURCHASE COMMITMENTS AND SIGNIFICANT RISK CONCENTRATIONS (continued)

On August 1,2006, in conjunction with the LMNGA Gas Project No. 1, as discussed in Note 3, the Authority also entered into a Purchase Agreement for purchase and sale of natural gas. Related to this program, tiie Authority has entered into corresponding gas supply contracts with certain participating members to purchase natural gas from the Authority in volumes corresponding to the Authority's Purchase Agreement commitment. The Prepaid Gas Program is also dependent on participating members honoring their respective gas purchases commitments.

The Authority has entered into significant agreements for which it is dependent on the performance counterparties to meet tiieir contractual obligations. The Authority has entered into guaranteed investment contracts and with JP Morgan Chase for a long term prepaid natural gas supply contracts with JP Morgan Ventures Energy Corporation whose performance is also guaranteed by JP Morgan Chase. The Authority has also entered into a conunbdity price hedge agreement with BNP Paribas Bank over the same term ofthe prepaid gas pro-am.

For the Requirements Gas Fund, the Authority routinely enters into short term gas purchase commitments Avith various vendors in the ordinaiy course of business. The purchase commitments usually include the volume of gas to be purchased and the purchase price of these volumes. The Requirements Gas Fund bills its members based on the actual cost of gas incurred. During 2011, the Requirements Gas Fund purchased approximately 64% of its gas purchases fiom two vendors, which individually comprised purchases of 40% and 24%, respectively. During 2010, the Requirements Gas Fund purchased approximately 57% of its gas purchases fiom two vendors.

Management continually monitors the financial condition of the counterparties and believes the counterparties currentty have the ability to meet their obligations under the respective agreements. The inability of any counterparty to perform under their contractual obligations over the duration of the contracts would have significant adverse financial and operational impacts on the Authority.

BONDS PAYABLE

On August 1, 2006, the Authority issued revenue bonds in tiie amount of $223,705,000 with an initial term of ten years related to the LMNGA Gas Project No. 1 (See note 3). The revenue bonds do not constitute a debt, liability, or moral obligation of the State of Louisiana or any political subdivision thereof and are limited obligations of the Authority, payable only fi-om the income, revenues and receipts derived from the sale ofthe prepaid natural gas supply, the interest rate sw£^ agreement, the commodity hedge agreement, and other investments held under and pursuant to the trust indentures.

The assets generated with the proceeds of these bonds are pledged as collateral for the payment of principal and interest on the bond indebtedness of only the Project. The ability ofthe Project to meet the debt service requirements on the bonds is dependent upon the ability ofthe members participating in the Project to generate sufficient funds to purchase their respective contractual volumes of natural gas pursuant to the respective supply agreements and financial performance of contract counterparties described in Notes 3 and 4.

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5. BONDS PAYABLE (continued')

The Authority has entered into interest rate swap Agreement witii JPMorgan Chase Bank to reduce its interest rate risk by effectively fixing the interest rate to be mcurred by the Authority over the terms of the bond (see note 4). Under this agreement, the Authority pays the counterparty interest payments based upon a fixed interest rate of 4.467%, while the counterparty makes payments to the Authority based on a floating rate of interest The intention ofthe swap agreement was to efiTectively change the bond's variable interest rate to a synthetic fixed rate of 4.517%, excluding other fees associated with the bonds. Additionally, the Authority pays the counterparty a fee equal to 0.05% per annum of bonds outstanding. Under the terms of the swap agreement effective August 1, 2006, the Autiiority pays a fixed rate of 4.517% and the swap counterparty will pay a variable rate based upon the SIFMA, formerly USD-BMA, Municipal Swap Index plus 0.49% which was 0.59% and 0.83% at December 31, 2011 and 2010, respectively. The cost of this swap agreement is included in interest expense.

As of December 31, 2011 and 2010, accmed mterest payable on the bonds was $2,188,915 and $2,612,004, respectively. For the years ended December 31,2011 and 2010, interest e3q)ense related to these bonds was $6,052,932 and $7,111,763, respectively. Interest expense includes the amortization of deferred financing costs of $207,330 and $244,080 for the years ended December 31, 2011 and 2010, respectively. Interest and principal payments are payable semiannually on each Februaiy 1 and August 1. The maximum interest rate due on the bonds is 8%. The bonds mature August 1,2016 and are subject to redemption and mandatory smking fiind redemptions.

At December 31, 2011 and 2010, Louisiana Municipal Natural Gas Purchasing and Distribution Autiiority Revenue Bonds outstanding were as follows:

2011 2010

Series 2006 LMNGA Gas Project No. 1 dated August 1,2006, due and term to August 1,2016, bearing a variable rate of interest $ 116.300.00Q $ 138.7)^0,000

As ofDecember 31, 2011and 2010, the interest rate swap agreement had an estimated negative fair value of $10,054,500 and $11,054,000, respectively. This mark-to-market valuation represents estimates ofthe amounts that would be paid or received for replacement transactions.

16



5. BONDS PAYABLE (continued^

The derivative contract uses the Intemational Swap Dealers Association Master Agreement, which includes standard termination events, including but not limited to failure to pay, bankmptcy, and rating downgrade. Either party may terminate tiie swap if the other party fails to perform under the terms of the contract If either swap is terminated, the variable rate bonds would no longer cany a synthetic interest rate. Also, if at the tune of termination the swap has a negative fair vdue, the Autiiority would be liable to the counterparty for a payment equal to tiie swap's fair value. As ofDecember 31,2011, tiie counterparty was rated Al according to Moody's and A according to Standard & Poor's and no liability for termination ofthe contract has therefore been recorded.

Using market based interest rates as of December 31,2011, debt service requirements ofthe variable rate debt and net swap payments, assuming current interest rates remain the same fcH* tiieir term. As rates vary, variable rate bond interest payments and net swa^ payments will vary.

The bonds are subject to mandatory sinking fimd redemption on August 1 of each bond year commencing on August 1, 2007. The minunum debt service payments over the life ofthe bonds are scheduled to occur as follows (in thousands):

Year Ending December 31

2012 2013 2014 2015 2016 Total

$

$

Principal

22.620.000 22,645,000 22,950,000 23.450,000 24,635,000

116,300,000

$

$

Interest*

4,82-7,544 3,805,328 2,776,713 1.730.651

649.112 13.789.348

$

$

Total

27,447,544 26.450,328 25,726,713 25.180,651 25,284,112

130,089,348

* Computed using fixed rate of interest as described above through the use ofthe interest rate swap.

LINES OF CREDIT

The Authority has entered into two new lines of credit with JPMorgan Chase Bank. The first line of credit is available to the Requirements Gas Fund and has a credit limit ofthe lesser of $750,000 or 95% of the accounts receivable balance for this Fuiid. As of December 31,2011 and 2010, The Authority had no outstanding balance on this line of credit The second line of credit is available to the LMNGA Gas Project No. 1 Fund and has a credit limit of $1,000,000. As ofDecember 31,2011 and 2010, tiie Autiiority had no outstandmg balance on tius line of credit. Both lines of credit bear interest at the prime rate, as determined armually by JPMorgan Chase, plus 1.5%, ^ i c h was 4.75% at December 31, 2011 and 2010. Each line is secured by the accounts receivable balances ofthe respective Funds and originally matured on July 31,2009, and has been extended until July 31,2012.

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THE LOUISIANA MUNICIPAL NATURAL GAS PURCEUSING AND DISTRIBUTION AUTHORITY


7. PARTICIPANT REIMBURSEMENT

In accordance with supply agreements executed in conjunction with LMNGA Gas Project No. 1, participating members of LMNGA Gas Project No. 1 obtain initial discounts of $0.10 per MMBtu upon montiily purchase of natural gas. Additionally, the Authority is required to refimd, if available, a portion ofthe cost paid by tiie participants subsequent to the end ofthe bond year at July 31. This calculation is based upon excess revenues less annual expenses, as defined in the supply agreements, on a pro-rata basis to each participant based upon the fraction of the prepaid natural gas that each participant was contractually required to purchase. For each ofthe years ended December 31,2011 and 2010 the Authority has estimated approximately $155,944 and $171,747, respectively, is due to each of members that is accmed and included in accounts payable and other liabilities related to participant reimbursements.

8. U.S. GOVERNMENT ARBITRAGE REBATES

A computation is required to be made at the end of each bond year, which is payable at the end ofthe fifth bond year, every five years tiiereafier, and upon final maturity of the bonds, to calculate the amount, if any, that is to be rebated to the U.S. Govemment for the difference in the investment yield and the bond yield, in order for tiie Pro-am to maintain its tax exempt status. The arbitrage rebate owed to tiie U.S. Govemment has been estimated at $8,592 at March 1,2012.

9. Subsequent Events

Management has evaluated subsequent events through the date that the financial statements were available to be issued, which was June 4, 2012, and determined that there were no significant subsequent events that required disclosure in the financial statements. No subsequent events occurring after this date have been evaluated for inclusion in these financial statements.

18-

SUPPLEMENTAL INFORMATION


COMBW

Cuirent assets:

Oish

Accounts receivable, net

Investmeats

Accrued interest receivable

Fiepaid insurance

Prepaid natural gas purchases, current portion

Total current assets

Odier assets:

Investments, restricted

Deferred financing costs, net of accumulated amon

Prepaid natural gas purchases

Total other assets

Total assets

Current liabilities

Accounts psydblc and other liabilities

Interest p a ^ l e

Bonds payable, current portion

Total current liabilities

Long-term liabilities

Bonds payable

Total liabilities

Net assets - unrestricted

Net assets - restricted bond indenture

Total net assets

Total liabilities and net assets

« N G S T

DEC

ization

ATEMENTS OF NET ASSETS

: E M B E R 3 1 , 2 0 1 1

Requiranents Gas LMNGA Gas Project

Fund No. 1 Fund

$ 398,033

2,284.802

10.106

2.692.941

• •

$ 2,692.941

$ 2.282,348

2,282.348

2,282.348

410.593

410.593

$ 2,692.941

$

S

$

$

(3.066)

4,615,618

6,60U59

79.474

22.388,728

33,682.113

1,605.158

481.567

86,120,920

88,207,645

121,889,758

165.200

2,188.915

22.620.000

24.974,115

93,680.000

118,654.115

3,235,643

3.235,643

121,889.758

Total

$ 394,967

6.900.420

6,60U59

79,474

10,106

22,388.728

36,375.054

1,605,158

481.567

86.120,920

88.207,645

$ 124.582.699

$ . 2.447,548

2,188,915

22,620,000

27,256,463

93,680,000

120.936.463

410,593

3,235.643

3,646,236

$ 124.582,699

See accompanying independent auditors' report

19


COMBINING STATEMENTS OF REVENUES. EXPENSES AND CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31.2011

Operating revenues: Oas sales Membership dues Legal fees billed Late charges Less: prepay member discount

Total operating reivenues

Operating expenses: Cost of natural gas Purchase agent fee Management fee Interest e?qpense Legal and professional fees Bad debt ej^pense Miscellaneous e3q}enses Aibitrage rebate expense

Total operating expenses

Requirements Gas Fund

$ 21,353,218 600.620

66354 3,548

. 22,023,740

21330,942 400.411 165,886

-120,037 67,667 18,056

-22.102.999

LMNGA Gas Project No.

$

IFund

19.832,126 ---

(740353) 19.091,773

13389,612

-6,052,932

14,250 *

13,936 8392

19.479322

Total

$ 41.185344 600.620

66354 3348

(740353) 41,115,513

34,720,554 400,411 165.886

6.052,932 134.287 67.667 31.992 8.592

41382321

Operating loss (79,259) (387349) (466,808)

Other revenues: Interest income

Change in net assets

Net assets, beginning of year

Net assets, end of year

256

(79,003)

489.596

410.593 _$

653,495

265,946

2,969,697

3,235,643

653.751

186,943

3.459,293

S 3,646^36^

See accompan^ng independent auditors* report

20

• B J ^ 0 l Postlethwaite M S a J & Netterville

A (Vofeu iond Accounting Co^xiroHon

Auoc ia lad OfRcos in Princjpd CHies 6 i the United Staias

www.pncpa.com

REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS

PERFORMED IN ACCORDANCE WTTH GOVERNMENTAUPmNG STANDARDS

To the Board of Directors The Louisiana Municipal Natural Gas

Purchasing and Distribution Authority Baton Rouge, Louisiana

We have audited the financial statements of Louisiana Municipal Natural Gas Purchasing and Distribution Authority (the Authority), as of and for tiie year ended December 31,2011, and have issued our report thereon dated June 4, 2012. We have conducted our audit in accordance with auditing standards generally accepted in the United States of America and &e standards applicable to financial audits contained m Govemment Auditing Standards* issued by the Comptroller General of the United States.

Intemal Control Over Fmancial Reporting

Management of the Fund is responsible for establishing and maintaining effective intemal control over financial reporting. In planning and performing our audit, we considered the Fund's intemal control over financial reporting as a basis for designing our auditmg procedures for the purpose of expressing our opinion on tbe fmancial statements, but not for the purpose of expressing an opinion on the effectiveness ofthe Bureau's intemal control over financial reporting. Accordingly, we do not express an opinion on die effectiveness ofthe Fund's intemal control over financial reporting.

A deficiency in intemal control exists when the design or operation of a control does not allow management or employees, in the nonnal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in intemal control, such tiiat there is a reasonable possibility that a material misstatement ofthe entity's financial statements will not be prevented, or detected and corrected on a timely basis.

Our consideration of intemal control was for the limited purpose described in tiie preceding paragraph and was not designed to identify all deficiencies in int^nal control over financial reporting that we consider to be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in intemal control over financial reporting that we consider to be material weaknesses, as defined above.

Compliance and Other Matters

As part of obtaining reasonable assurance about whether the Autiiority's financial statements are fi^e of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not e3q>ress such an opinion. The results of our tests disclosed no instances of noncompliance or otiier matters that are required to be reported under Govemment Auditing Standards.

21-

8550UnitedPlozaBlvd, Suite 1001 • Baton Rouge, LA 70809 • Tel: 225.922.4600 • Fox: 225.922.4611

http://www.pncpa.com

This report is intended solely for the mfoimation and use of management, Louisiana Municipal Natural Gas Pmchasing and Distribution Authority, others witiim tiie entity, and the Legislative Auditor oftiie State of Louisiana and is not intended to be and should not be used by anyone other than these specified parties. Under Louisiana Revised Statute 24:513, tiiis report is distributed by the Legislative Auditor as a public document

7 ^ ^ / A W*JU *" AMtk'vi.'̂ U Baton Rouge, Louisiana June 4,2012

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